horngren acct7 ch01 stu

Copyright © 2007 Prentice-Hall. All rights reserved 1

Accounting and theAccounting and theBusiness EnvironmentBusiness Environment

Accounting and theAccounting and theBusiness EnvironmentBusiness Environment

Chapter 1


Objective 1Objective 1Objective 1Objective 1

Use accounting vocabulary


AccountingAccountingAccountingAccounting

• Measures

• Processes

• Communicates……

Financial information to decision makers


Decision MakersDecision MakersDecision MakersDecision Makers

• Individuals

• Businesses

• Investors

• Creditors

• Taxing Authorities


Financial vs. Managerial Financial vs. Managerial AccountingAccounting

Financial vs. Managerial Financial vs. Managerial AccountingAccounting

• Financial Accounting – Information for people outside of the company

• Managerial Accounting – Information for internal decision makers


Governing OrganizationsGoverning OrganizationsGoverning OrganizationsGoverning Organizations

• FASB – Financial Accounting Standards Board

• SEC – Securities and Exchange Commission

• AICPA – American Institute of Certified Public Accountants

• IMA – Institute of Management Accountants


EthicsEthicsEthicsEthics

• Audit– Examination of company’s financial situation– Performed by independent accountants

• Sarbanes-Oxley Act – criminal offense to falsify financial statements

• Public Companies Accounting Oversight Board – monitors work of accountants


Standards of Professional ConductStandards of Professional ConductStandards of Professional ConductStandards of Professional Conduct

• AICPA – Code of Professional Conduct for Accountants

• IMA – Standards of Ethical Conduct


Types of Business Types of Business OrganizationsOrganizations

Types of Business Types of Business OrganizationsOrganizations

• Proprietorships

• Partnerships

• Corporations



Apply accounting concepts and principles


GAAP GAAP GAAP GAAP

• Generally Accepted Accounting Principles– Accounting guidelines that govern how

accountants measure, process, and communicate financial information

• Formulated by Financial Accounting Standards Board (FASB)


GAAPGAAPGAAPGAAP

• Primary objective of financial accounting – provide information that is useful for making investment and lending decisions


Entity ConceptEntity ConceptEntity ConceptEntity Concept

• Accounting Entity – organization that stands apart as a separate economic unit


• Accounting information is based on the most reliable data available– Verifiable– Free from bias– Individuals would arrive at similar conclusions

using same data

Reliability (Objectivity) PrincipleReliability (Objectivity) PrincipleReliability (Objectivity) PrincipleReliability (Objectivity) Principle


Cost PrincipleCost PrincipleCost PrincipleCost Principle

• Acquired assets and services should be recorded at their actual cost (historical cost)


Going Concern ConceptGoing Concern ConceptGoing Concern ConceptGoing Concern Concept

• Assumes that the entity will remain in operation for the foreseeable future


Stable-Monetary-Unit ConceptStable-Monetary-Unit ConceptStable-Monetary-Unit ConceptStable-Monetary-Unit Concept

• Assumes that the dollar’s purchasing power is stable



Use the accounting equation


AssetsAssetsAssetsAssets

• Economic resources, expected to benefit the business in the future– Cash– Accounts receivable– Merchandise inventory– Furniture– Land


Claims to the AssetsClaims to the AssetsClaims to the AssetsClaims to the Assets

• Liabilities – economic obligations payable to an individual or organization outside the business– Accounts payable– Notes payable– Salary payable


Claims to the AssetsClaims to the AssetsClaims to the AssetsClaims to the Assets

• Owner’s Equity (capital) – claim of business owner to the assets of the business


EconomicResources

Claims toEconomicResources

The Accounting EquationThe Accounting EquationThe Accounting EquationThe Accounting Equation

Assets = Liabilities + Owner’s Equity


Transactions that AffectTransactions that AffectOwner’s EquityOwner’s Equity

Transactions that AffectTransactions that AffectOwner’s EquityOwner’s Equity

OWNER’S EQUITY

INCREASES

OWNER’S EQUITYDECREASES

Owner Investments

Revenues Expenses

Owner Withdrawals

Owner’s Equity


RevenuesRevenuesRevenuesRevenues

• Amounts earned by delivering goods or services to customers– Sales revenue– Service revenue– Interest revenue– Dividend revenue


ExpensesExpenses

• Decrease in owner’s equity that occurs from using assets or increasing liabilities in the course of delivering goods or services to customers– Salary expense– Rent expense– Utilities expense– Interest expense


Exercise 1-18Exercise 1-18Exercise 1-18Exercise 1-18

Assets Liabilities Owner’s Equity

Pep Boys $ ? $60,000 $21,000

Eddie Bauer 72,000 ? 40,000

Benbrook Exxon

100,000 79,000 ?

$81,000

32,000

21,000



Analyze business transactions


TransactionTransactionTransactionTransaction

• An event that affects the financial position of a particular entity and can be recorded reliably



a. Increased assets (cash)

b.No effect on total assets. Increase in land offset the decrease in cash

c. Decreased assets (cash)

d. Increased assets (equipment)



e. Increased assets (accounts receivable)

f. Decreased assets (cash)

g. No effect on total assets. Increase in cash offset the decrease in accounts receivable

h. Increased assets (cash)


Does the account increase or decrease?

(1) Cash (asset)

(2) Owner’s Equity (equity)

July 6: Lange invested $45,000 in the business by opening a bank account in the name of M. Lange, M.D.

Analyze this:Analyze this:Analyze this:Analyze this:

What accounts are involved?


Date Assets Liabilities Owner’s Equity

July Cash Medical Supplies

Land Accounts Payable

M.Lange, Capital

Type of Transaction


45,000 Investment

Assets = $45,000 Liabilities & Owner’s Equity = $45,000

45,0006


(1) Cash (asset)

(2) Land (asset)


July 9: Paid $35,000 cash for land

Does the account increase or decrease?What accounts are involved?





M.Lange, Capital

Type of Transaction


45,000 Investment

35,000


45,0006

-35,0009

45,00035,00010,000Bal


(1) Medical Supplies (asset)

(2) Accounts Payable (liability)


July 12: Purchased medical supplies for $2,000 on account

Does the account increase or decrease?What accounts are involved?





M.Lange, Capital

Type of Transaction


2,000


2,00012

45,00035,00010,000Bal

45,00035,00010,000Bal 2,0002,000



(1) Cash (asset)

(2) Revenues (equity)

Analyze This:Analyze This:Analyze This:Analyze This:

July 15-31: During the rest of the month, Lange treated patients and earned service revenue of $7,000, receiving cash


When the owner

completes work, her

interest in the assets

increases





M.Lange, Capital

Type of Transaction



7,00015-31 7,000 Revenue

52,00035,00017,000Bal 2,0002,000

45,00035,00010,000Bal 2,0002,000



(1) Cash (asset)

(2) Expense (equity)


July 15-31: Paid cash expenses


When an expense is incurred, owner’s equity decreases





M.Lange, Capital

Type of Transaction



52,00035,00017,000Bal 2,0002,000

-1,70015-31 -1,700 Salaries Exp

-1,000 Rent Exp-1,000

- 300 Utilities Exp- 300

49,00035,00014,000Bal 2,0002,000



(1) Cash (asset)

(2) Medical Supplies (asset)


July 28: Sold supplies to another physician for the cost of those supplies






M.Lange, Capital

Type of Transaction



500 28 -500

49,00035,00014,500Bal 2,0001,500

49,00035,00014,000Bal 2,0002,000



(1) Cash (asset)

(2) Accounts Payable (liability)


July 31: Paid $1,500 on account






M.Lange, Capital

Type of Transaction



-1,500 31 -1,500

49,00035,00014,500Bal 2,0001,500

49,00035,00013,000Bal 5001,500


Accounting for Business Accounting for Business TransactionsTransactions

Accounting for Business Accounting for Business TransactionsTransactions

• Note: The equation always stays in balance

• Each transaction affects at least two accounts, sometimes more

• Some transactions affect only one side of the equation; some affect both sides



Prepare financial statements

Evaluate business performance



Financial StatementsFinancial StatementsFinancial StatementsFinancial Statements

• Income statement

• Statement of owner’s equity

• Balance sheet

• Statement of cash flows


Income StatementIncome StatementIncome StatementIncome Statement

• Summary of an entity’s revenues, expenses, and net income or net loss for a specific period

Revenues - Expenses

• Net Income: Revenues > Expenses

• Net Loss: Expenses > Revenues


Statement of Owner’s EquityStatement of Owner’s EquityStatement of Owner’s EquityStatement of Owner’s Equity

• Summary of changes in an entity’s owner’s equity during a specific period

Beginning owner’s equity+ Owner’s investments+ Net income- Net loss- Owner’s withdrawalsEnding owner’s equity


Balance SheetBalance SheetBalance SheetBalance Sheet

• Reports the entity’s assets, liabilities, and owner’s equity as of a specific date

Assets = Liabilities + Owner’s Equity


Statement of Cash FlowsStatement of Cash FlowsStatement of Cash FlowsStatement of Cash Flows

• Reports cash receipts and cash payments during a period (covered in Chapter 17)


Financial StatementsFinancial StatementsFinancial StatementsFinancial Statements

• Using the transactions from Exercise 1-22, prepare the income statement, statement of owner’s equity, and balance sheet


Maria Lange, M.D.Maria Lange, M.D.Income StatementIncome Statement

For the Month Ended July 31, 2006For the Month Ended July 31, 2006

Maria Lange, M.D.Maria Lange, M.D.Income StatementIncome Statement


Revenue:

Fees earned$7,000

Expenses:

Salary expense $1,700

Rent expense 1,000

Utilities expense 300

Total Expenses3,000

Net income$4,000

Notice the proper

heading

Anytime you

subtotal, create a

new column to the left

Double underline for your

final answer


Maria Lange, capital, July 1, 2006 $ 0

Add: Investment by owner 45,000

Net income for the month 4,000

$49,000

Less: Withdrawals by owner 0

Maria Lange, capital, July 31, 2006 $49,000

Maria Lange, M.D.Maria Lange, M.D.Statement of Owner’s EquityStatement of Owner’s Equity


Maria Lange, M.D.Maria Lange, M.D.Statement of Owner’s EquityStatement of Owner’s Equity

For the Month Ended July 31, 2006For the Month Ended July 31, 2006Dates are important to the reader of the financial

reports

From incomestatement


Details, DetailsDetails, DetailsDetails, DetailsDetails, Details

• Note the headings for both of these statements– Name of company– Name of financial statement– For the period ended …….

• Both of these statements report activity over a period of time

• Final sums are double-underlined


Details, DetailsDetails, DetailsDetails, DetailsDetails, Details

• Negative amounts are presented in parentheses

• Net income is computed first because you need that number to complete the ending balance in owner’s equity

• When preparing a financial statement, clearly label each line in the statement


Details, detailsDetails, detailsDetails, detailsDetails, details

• If you are using columnar paper, always start your number columns in the far right-hand column

• Numbers that are added or subtracted from each other should be in the same column


Maria Lange, M.D.Maria Lange, M.D.Balance SheetBalance SheetJuly 31, 2006July 31, 2006

Maria Lange, M.D.Maria Lange, M.D.Balance SheetBalance SheetJuly 31, 2006July 31, 2006

Assets

Cash $13,000

Medical supplies 1,500

Land 35,000

Total assets $ 49,500

Liabilities

Accounts payable $500

Owner’s equity,

M. Lange, capital 49,000

Total liabilities and owner’s equity $ 49,500

From statement ofowner’s equity

Notice the proper

heading


Details, detailsDetails, detailsDetails, detailsDetails, details

• Note the heading for the balance sheet is different from the other statements

Name of company

Name of financial statement

Date

• This statement reports what the company owns and who has claims to the assets at a specific point in time


Cash $2,000

Accounts receivable 6,000

Supplies 500

Equipment 15,500

Total Assets $24,000

Allen Samuel Road ServiceBalance Sheet

November 30, 2009

Liabilities

Accounts payable $3,500

Note payable 5,000

Total liabilities $8,500

Owner’s Equity

A. Samuel, capital 15,500

Total liabilities and owner’s equity $24,000

Assets




What does a balance sheet report – financial position or operating results?

• Financial position

Which financial statement reports the other information?

• The income statement summarizes revenues and expenses

Exercise 1-26Exercise 1-26Exercise 1-26Exercise 1-26Ciliotta Design Studio

Income StatementYear Ended December 31, 2006

Service revenue $158,100Expenses:

Salary expense $60,000

Rent expense 24,000

Utilities expense 6,800

Supplies expense 4,000

Property tax expense 1,200

Total expenses 96,000

Net income $62,100



2. Owner’s withdrawals:

Ciliottas, capital, beginning of year $ 0

Add: Net income 62,100

Investment by owner 15,000

Subtotal $77,100

Less: Owner withdrawal ?

Ciliotta, capital, end of year $27,100 50,000


End of Chapter 1End of Chapter 1End of Chapter 1End of Chapter 1

horngren acct7 ch01 stu

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